Australia is on the brink of the largest intergenerational wealth transfer in its history, with an eye-watering $5.4 trillion expected to change hands over the next two decades.
For many, the idea of inheriting a tidy sum conjures up dreams of financial freedom, early retirement, or finally ticking off that bucket-list trip to the Greek Islands.
But before you start planning your next adventure or home renovation, it’s worth pausing to consider a sobering truth: most inheritances don’t deliver the life-changing impact we hope for. In fact, a significant portion of inherited wealth is lost to avoidable mistakes, tax traps, and poor planning.
So, how can you make sure your inheritance—or the one you plan to leave behind—doesn’t disappear faster than a tray of lamingtons at a family BBQ?
Let’s unpack the most common pitfalls and, more importantly, how to sidestep them.
The lifestyle trap: Spending vs. investing
It’s tempting, isn’t it? A sudden windfall lands in your lap, and the possibilities seem endless.
Many Australians use their inheritance to pay off the mortgage, upgrade the family home, or splash out on a luxury holiday.
While these choices aren’t inherently ‘bad’, they often don’t move the needle when it comes to long-term financial security.
Consider this: using a $300,000 inheritance to pay down your mortgage will certainly reduce your interest bill, but it also means missing out on the potential to build an investment portfolio that could generate $30,000 a year in growth and income—year after year.
That’s the difference between a one-off comfort boost and a lasting income stream.
The key takeaway? Before you rush to spend, ask yourself: ‘How can I use this money to build my investments and secure my future?’
Sometimes, the best way to honour a loved one’s legacy is to make their gift work for you for years to come.
The superannuation sting: Tax on inherited super
Australia may not have a formal inheritance tax, but that doesn’t mean the taxman isn’t lurking in the shadows.
One of the most overlooked traps is the tax on inherited superannuation, which can hit adult children particularly hard.
If you inherit super from a parent and you’re not classified as a dependent (i.e., you’re over 18 and financially independent), you could be taxed up to 32 per cent on the taxable component of the super fund.
For a $500,000 inheritance, that’s a potential $160,000 lost to tax—money your parents worked hard to save.
The good news? With the right planning, this tax can often be avoided.
A ‘withdrawal and recontribution’ strategy, where your parents withdraw their super and recontribute it as a non-concessional (after-tax) contribution while they’re still alive, can convert taxable super into tax-free super.
It’s a complex process, but the potential savings are significant. If you or your parents are in this position, it’s well worth seeking professional advice to explore your options.
The will dilemma: Outdated or non-existent wills
Shockingly, more than 60 per cent of Australians don’t have a valid will, and even more haven’t updated theirs in years.
Without a will, your estate is distributed according to state laws, not your wishes. This can lead to family disputes, lengthy delays, and unnecessary legal costs.
But even a basic will might not be enough. Enter the testamentary trust—a powerful tool that can provide flexibility, tax efficiency, and asset protection.
For example, income distributed to children under 18 via a testamentary trust is taxed at adult rates, potentially saving tens of thousands in tax each year.
Testamentary trusts can also shield assets from divorce or relationship breakdowns, keeping your family’s wealth where it belongs.
If you’re planning to leave money to your children, or expect to inherit from your parents, it’s crucial to have the right structures in place.
A well-crafted will and the use of trusts can make a world of difference to how long your legacy lasts.
The conversation we avoid: Talking about death and money
Let’s face it—no one enjoys talking about death, let alone money. But avoiding these conversations can be costly.
When families don’t discuss their wishes, assets, or the details of their estate plans, confusion and missed opportunities abound.
Whether you’re leaving an inheritance or expecting to receive one, make sure you know what assets exist, where they’re held, how they’ll be taxed, and what the will says. Understanding who the beneficiaries are and whether trusts are in place will help you make informed decisions and avoid nasty surprises.
Having these conversations while everyone is healthy and clear-headed can save a lot of heartache down the track. It’s not just about money—it’s about peace of mind for your loved ones.
Practical steps to protect your inheritance
1. Review and Update Wills Regularly: Life changes—so should your will. Make sure it reflects your current wishes and family circumstances.
2. Consider Testamentary Trusts: These can provide tax benefits and protect assets for future generations.
recontribution to minimise tax on inherited super.
4. Seek Professional Advice: Estate planning is complex. A qualified financial adviser or estate lawyer can help you navigate the rules and maximise your legacy.
5. Communicate Openly: Talk to your family about your plans and wishes. Transparency now can prevent disputes later.
Your turn: Have your say
Have you received an inheritance, or are you planning to leave one? Did you encounter any unexpected hurdles or learn any valuable lessons along the way? We’d love to hear your stories, tips, and questions in the comments below. Your experiences could help others avoid the same pitfalls.
Remember, a little planning today can make a world of difference tomorrow. Don’t let your family’s hard-earned wealth fall into avoidable traps—take action now to secure your legacy.
Disclaimer: This article is general in nature and does not constitute personal financial advice. Please consult a qualified professional for advice tailored to your circumstances.
Also read: Are Australians losing their inheritance? Experts warn of rising will disputes
